Wednesday, August 04, 2010

Crowding Out the Crowding Out Argument?

On CNBC the other day, Steve Leisman told Larry Kudlow that he was going to 'crowd out' his 'crowding out' argument. Last I checked, the textbooks still say that increasing government deficits lead to temporary (short-run) increase in GDP, which disappears when prices adjust in the medium term. But, sadly, we ARE left with a higher rate of inflation and a higher interest rate in the medium-term.

The higher interest rate obviously leads to less private investment. Thus, stimulative fiscal policy increases budget deficits which increases the interest rate which decreases private investment. This is what crowding out is. So, I'm not sure why Leisman says that he can crowd out Kudlow's crowding out argument.

1 comment:

So what do we do? Revert to the gold standard? Return to the protectionist policies of mercantilism we used in the beginning until we get back on our feet? I'm interested in what some economists have to say on this subject, I keep hearing how bail-outs and subsidies are bad, but the only thing i see to attack the abstract reasoning of one side is more abstract reasoning. I guess my question is this: how do we structure a recovery that lets the bad actors feel it in the pants? The poor and the middle class are going to get dumped on either way - how do we soften the blow to them (a necessity for a true recovery) and punish the wrongdoers without making things worse or killing anything "too-big-to-fail"?